Descartes Plots A Record Course In New Millennium

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Descartes Plots A Record Course In New Millennium
S. McVey - June 28, 2000

Event Summary

Waterloo, Ontario based Descartes Systems Group reported record revenue for the first quarter of fiscal 2001 ended April 30, 2000. Focused on building its transaction-based revenue model, Descartes still finds profits out of reach.

License and network revenue totaled $8.8 million in the first quarter of fiscal 2001, an increase of 138% from $3.7 million in the first quarter of fiscal 2000 and representing an increase of 33% over license and network revenue of $6.6 million in the fourth quarter of fiscal 2000 (Q4 FY00). [see Figure 1.]

Figure 1.

Total revenue for the first quarter topped $13.6 million, an increase of 11% from revenue of $12.2 million in Q4 FY00 and up 20% from revenue of $11.3 million in the same quarter last year. Descartes' transition to a network business model was reflected in the transition in revenue mix for license and network revenue, services revenue and hardware revenue over the past year. In Q1 FY00, services revenue was $5.7 million or 61% of revenue while license and network revenue was $3.7 million or 39% of revenue, net of $1.9 million in hardware revenue. In the current quarter, license and network revenue reached $8.8 million, representing 66% of revenue while services revenue reached $4.6 million, representing 34% of revenue. The company recorded approximately $200,000 in hardware revenue in the current period.

Net loss for the quarter was $23.5 million or ($0.56) per share compared with a net loss of $3.5 million or ($0.09) per share in Q4 FY00. Net loss for the quarter includes a one-time charge related to the purchase of in-process research and development of approximately $19 million and amortization charges of approximately $2 million related to the acquisition of E-Transport, Inc.

Figure 2.

Although it does not break down its revenue into licenses and network revenue, Descartes expects network revenue to grow as a segment of its total e-commerce revenue. The company defines network revenue as the subset of its revenues comprised of recurring subscription and transaction based revenues. Customers typically pay an up-front technology transfer fee followed some three to nine months later by monthly or per transaction fees.

Highlights for the quarter include the formation of DSD Solutions, Inc., a privately-held company that inherits Descartes' direct store delivery solutions business. Descartes transferred approximately 160 employees to the new venture in exchange for ongoing royalties from software sales and a 20% interest with an option to acquire an additional 20%. Taking the helm at DSD Solutions is Mark Lee, former board member and ten-year veteran of Descartes.

Descartes also completed its acquisition of E-Transport, Inc., a logistics exchange solution provider based in Pittsburgh, PA. Descartes offered $80 million (USD) in stock to the privately-held E-Transport. E-Transport's Marketplace is an online B2B transportation marketplace for shippers, carriers, and intermediaries, described as "a neutral switching station" where trading partners from around the world can conduct business, but still use their preferred data format and transmission means.

Market Impact

Despite a ten percent slump in revenue a year ago in fiscal 2000, Descartes maintains a strong position in the advanced logistics planning and execution software market and its first quarter results mark renewed growth. Its record first quarter revenues indicate that the market is convinced of its viability, even though Descartes has been losing money since 1995. This confidence is reflected in the company's stock, which, in spite of recent market tumbles, has brought an infusion of capital for use in funding operations and making acquisitions. Many top financial analyst firms have predicted a positive cash flow for Descartes by as early as 4Q 2001 (ending Jan. 31, 2001).

With its technological lead and large, referenceable customer base, Descartes will continue to prosper over the next few years, but will meet with increased competition from vendors like i2 Technologies, which is developing its own advanced logistics capabilities as part of TradeMatrix, and smaller companies such as Roadnet Technologies and G-Log Tech, which share many of Descartes' strategic alliance partners (Ernst & Young, Cap Gemini, Intermec, and Symbol Technologies).

User Recommendations

Users in consumer-direct businesses characterized by volatile demand whose customers place high value on prompt delivery of goods should place Descartes on any short list. Home delivery is a major market for Descartes, whose DeliveryNet solutions are used by customers in Europe and North America, including Europe based Star's Services, LM Solutions, and U. S. based Webvan. Descartes also numbers many e-commerce startups among its home delivery customers, such as, Parachute, CleanWave, Grocery Gateway,, and Webvan. Descartes' success-based pricing model offers an attractive alternative for fledgling e-commerce companies due to smaller initial fees.

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